15 July 2016

CAN SAUDI ARABIA COOK A HOMEMADE DEFENSE INDUSTRY? NOT WITH OIL IN THE RECIPE

Earlier this year, Saudi Arabia announced an ambitious plan to reform its defense industry as part of its overall vision to wean itself off oil revenue dependency, with a goal of producing 50 percent of its military equipment domestically by 2030. The plan calls for the development of an advanced manufacturing apparatus that would replace the need to purchase state-of-the-art military hardware from outside and provide Saudi citizens with more jobs. While this plan demonstrates that the new Saudi prince understands the problems of relying too heavily on foreign military providers, it is an unrealistic plan that fails to acknowledge what causes this reliance in the first place. In short, the kingdom’s complete dependence on volatile oil revenue to jumpstart its domestic defense sector will ultimately lead to this plan’s demise so long as this dependence still exists. Saudi’s defense reform cannot succeed in parallel to its economic reforms, only as a result of it. So long as its budget is still reliant on oil, any attempts at reform will be abandoned once global oil prices change dramatically, either up or down, as happened for numerous other oil exporting states in similar cases.

Major oil exporters such as Saudi Arabia have attempted to reform their procurement-heavy military throughout the 90s, with little success. Oil-rich countries such as Iraq or Nigeria, both of which have been plagued with corruption and dysfunction in their domestic defense industries, failed in similar efforts. I argue in my ongoing PhD researchthat these countries’ failure to develop capable industries has stemmed in large part from their over-reliance on volatile oil revenues to sustain their security budgets. Such reliance on a commodity known for its unparalleled “bust and boom” price cycles creates an unstable economic base for the initial development of domestic defense industries (if these did not exist before oil was found) and undermines ambitious military reforms. Expensive projects are abandoned whenever global oil prices fall, while reforms to increase efficiency are deemed unnecessary once oil prices rise again. Problems also emerge due to volatility-fueled corruption, with military officials favoring procurement of expensive yet unnecessary hardware in return for kickbacks. This occurs particularly in periods when state revenues are high due to a rise in global oil prices. Such was the case in Venezuela, Algeria, and Chad just before the crash in oil prices in 2015, among many other examples. These lavish procurements, which sometimes never actually arrive, are much more appealing to the oil-rich state than long-term investments in a local industry that would falter once oil prices begin to decline again. Oil-rich countries also suffer from a lack of local talent in high-tech industries due to the allure of the high-paying low-tech oil sector, creating a lack of quality personnel to promote innovation in their defense industry.

This combination of factors has resulted in the creation of “ready-bought oil militaries” that are impressive on paper due to their expensive foreign-made hardware, but ultimately fall apart when tested in battle. The poor performancesof both the Iraqi and Saudi militaries during the first Gulf War, and of both sides of the Iran-Iraq War, can be said to be examples of this process. The ongoing Saudi intervention in Yemen is shaping up to be another example of a poorly performing expensive military.

Establishing a functional and advanced military industry from scratch, as Saudi Arabia’s plan essentially requires, demands several preconditions. First, a country’s military and defense sector must have a stable economic environment and a fixed long-term budget in order to plan ahead, something export-reliant oil states such as Saudi Arabia have trouble providing. Second, the country needs a diverse pool of well-educated and innovative local engineers to create a defense industry, something which Saudi Arabia severely lacks. Third, the newly formed domestic defense industry needs to manufacture hardware that is either advanced enough or cheap enough to compete in world markets. Otherwise it becomes just another government subsidized industry that depends on oil-based government funds to sustain itself. This last precondition is highly unlikely in the Saudi case, as their domestic defense industry will have trouble competing with other countries’ more experienced defense industries on either the technological sophistication or the price front.

In order to succeed, Saudi Arabia needs a multi-year fixed military budget that is independent of any changes in global oil prices. It must also expand its pool of local engineers by opening its markets to foreign companies. These will help promote technology transfers and innovation within its military ranks. But as long as oil remains the primary engine of Saudi Arabia’s economy, providing for 87 percent of budget revenues, the kingdom will not be able to meet these criteria and create the advanced local military industry it wants. Once the dominance of oil in the state’s budget subsides due to economic reforms, and only then, can a defense reform truly begin. Reforming the military will not fix Saudi Arabia’s dysfunctional economy. Rather, reforming the economy can help fix Saudi Arabia’s dysfunctional military.

Elai Rettig is doctoral student at the School of Political Science in the University of Haifa, and a visiting scholar at the Institute for Security and Conflict Studies (ISCS) in the Elliott School of International Affairs at George Washington University. His dissertation focuses on the “resource curse” phenomenon and on its impact on defense sector structuring among major oil exporting states. He also deals with Israeli energy security and with Middle East and East Mediterranean energy politics.